What is a Broker-Dealer? - Davis Polk & Wardwell

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§ 1A:2.6 BROKER-DEALER REGULATION . . . a broker-dealer must control the amount of securities-related compensation received by its registered representatives, and the timing of that compensation. Any other arrangement could permit unregistered persons to interfere with the broker-dealer’s control over its representatives’ securities activities. That type of interference would conflict with self-regulatory organization rules requiring broker-dealer to supervise the securities activity of their personnel, and could undercut investor protection by weakening the application of customer protection rules governing registered representatives’ securities activities. Moreover, permitting unregistered persons to influence the securities compensation of registered representatives could facilitate other abuses, such as providing a means for statutorily disqualified persons to engage in securities activities. 141 [H] Personal Service Companies The SEC has distinguished companies providing employee leasing services from those personal service companies owned by registered representatives of broker-dealers. 142 The SEC staff has consistently declined to grant no-action relief with respect to personal service companies owned by registered representatives operating without registration under section 15 of the Exchange Act, in particular where the following factors are present: 143 • The company would receive commissions or other transactionrelated compensation earned by the registered representatives directly or indirectly from the broker-dealer; • the company would then use the money to make payments to the registered representatives including commissions payments and benefits and cover other company expenses; • the business purpose of the company would be to provide various services and employee benefits to its employees; 141. See Investacorp Group, Inc., Investacorp, Inc., SEC No-Action Letter (Sept. 26, 2003). 142. See ADP TotalSource, Inc., SEC No-Action Letter (Dec. 4, 2007); eEmployers Solutions, Inc., SEC No-Action Letter (Dec. 3, 2007). 143. See, e.g., Wolff Juall Investments, LLC, SEC Denial of No-Action Request (May 17, 2005); Vanasco, Wayne & Genelly, SEC Interpretive Letter (Feb. 17, 1999); Birchtree Financial Services, Inc., SEC Denial of No-Action Request (Sept. 22, 1998); First Financial of Citrus County Inc., SEC Denial of No-Action Request (Sept. 22, 1998); Century Investment Group Inc., SEC Denial of No-Action Request (Jan. 29, 1996); Voluntary Benefit Systems Corp. of America, SEC Denial of No-Action Request (Nov. 14, 1995); Lombard Securities Inc., SEC Denial of No-Action Request (July 12, 1994). 1A–36
What Is a Broker-Dealer? § 1A:2.6 • and, unlike the companies that provide employee leasing services, the personal service companies make decisions regarding the payments of commissions and other benefits to the registered representatives who are employees of the personal service companies. The SEC staff has taken the position that the receipt of securities commissions or other transaction-related compensation is a key factor in determining whether a person or an entity is acting as a broker-dealer, 144 and that, absent an exemption, an entity that receives commissions or other transaction-related compensation in connection with securities-based activities generally is required to register as a broker-dealer under section 15 of the Exchange Act. 145 [I] Other Service Providers to the Securities Industry, Broker-Dealers or Issuers [I][1] Communications Services The SEC has granted no-action relief to companies that proposed to provide communications services to support or assist securities transactions without registering under section 15 of the Exchange Act. The factors that the SEC has identified in granting no-action relief to providers of the communications services include, among others, that the providers will not: (i) hold or have access to or handle funds or securities; (ii) recommend or endorse specific securities; (iii) become involved (other than by routing messages) with the financial services offered by broker-dealers, including, among others, the opening, maintenance, administration, or closing of accounts, or the solicitation, processing or facilitation of transactions of any kind relating to accounts; (iv) participate in any purchase or sale negotiations; (v) directly or indirectly make any statement about, or endorsement or recommendation of any kind of, any broker-dealer to any manager; 144. See Wolff Juall Investments, LLC, SEC Denial of No-Action Request (May 17, 2005); Birchtree Financial Services, Inc., SEC Denial of No-Action Request (Sept. 22, 1998); Vanasco, Wayne & Genelly, SEC Interpretive Letter (Feb. 17, 1999). 145. See id. (Broker-Dealer Reg., Rel. #9, 9/10) 1A–37
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